Online Brokers Basket Vs. Broad Market Funds

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Includes: AMTD, DIA, ETFC, IBKR, IWM, SCHW, SPY, XLF
by: FX Metrix, LLC

Summary

We compare equal weighted and a market cap weighted baskets of online brokerage stocks to the S&P500 to see which performs better in the long term.

Regardless of which weighting methodology used, brokers beat 'the market' over the last 5-year period.

We also compare dividend yields for those with a focus on income.

The lesson: Buy shares of brokerages through your broker.

Background

For years investors, reporters, and economists alike have looked at the S&P 500 and other major U.S. market indices as benchmarks for measuring portfolio returns against. As widely accepted measures of the broader U.S. stock market, their rise back to current levels from crisis lows was an indication that the economy but more so the market has been recovering nicely since then. As seen below, the S&P 500 has risen roughly 48.59% over the last 5-year period.

^SPX Chart

data by YCharts

Our question we had was: if the stock market has fared so well over the last 5-years of economic/market recovery, then how have the online stock brokers fared? We compiled a basket of 4 major online brokers as charted above. We excluded names like BAC since their Merrill Edge program was not a large enough source of revenues. The brokers basket consisted of (in no particular order):

  • Interactive Brokers Group, Inc (NASDAQ:IBKR)
  • E*TRADE Financial Corp. (NASDAQ:ETFC)
  • TD Ameritrade Holding Corp. (NASDAQ:AMTD)
  • Charles Schwab Corp. (NYSE:SCHW)

While IBKR has clearly outperformed the group, AMTD and SCHW have both underperformed the S&P 500 on a 5-year basis. This will make for an interesting comparison of the basket with various weightings.

We have weighted our baskets using two different methods to illustrate that investing in online brokerage companies themselves has greatly outperformed the market indices no matter which weighting method we choose.

Market Capitalization Weighted Basket

Stock Market Cap. Weight 5-Year Performance
(as of close01/22/16)
IBKR $13.02 B 19.3606% 98.53%
ETFC $7.12 B 10.5874% 51.13%
AMTD $15.01 B 22.3197% 43.05%
SCHW $32.10 B 47.7323% 42.00%
TOTAL $67.25 B 100.00% 54.1455% (vs. 48.59% from S&P500)
Click to enlarge

Equal Weighted Basket

Stock Weight 5-Year Performance (as of close 01/22/16)
IBKR 25.00% 98.53%
ETFC 25.00% 51.13%
AMTD 25.00% 43.05%
SCHW 25.00% 42.00%
TOTAL 100.00% 58.6775% (vs. 48.59% from S&P500)
Click to enlarge

As we can see, either basket would have outperformed the S&P 500 over the last 5-year period. as well as all major U.S. broad market index over the same time period except the NASDAQ 100 index, which has jumped 87.79% over the last 5 years. Both of our brokers baskets even outperformed the DJ U.S. Financials Index over the last 5 years

^SPX Chart

^SPX data by YCharts

Lower Dividend Income

As of the close on 01/22/16, the dividend yield for the S&P 500 index was 2.28%. For those with a focus on income, a basket comprised of the four online brokerages would currently have a lower dividend yield based on 12 month dividends per share.

IBKR Dividend Yield (<a href=

IBKR Dividend Yield (TTM) data by YCharts

However AMTD offers a nearly identical dividend yield as SPY with 2.13% based on the $0.40 paid per share over the last 12 months. ETFC on the other hand does not pay a dividend at all, significantly lowering the basket's dividend yield.

Commissions

Last but not least we wanted to compare online brokerage commissions between the four names included above. After all, this is where the cash-flow comes from.

Commissions vary between these brokerages due to differences in account requirements, platform, and more. For those who are really trying to cut commissions costs completely (and also ready to give up advanced platform capabilities), consider giving Robinhood Brokerage a shot with $0.00 commissions.

Broker Online Equity Commissions (100 Shares)
IBKR $1.00
AMTD $9.99
ETFC $9.99
SCHW $8.95
Click to enlarge

Conclusion

Overall, we have found that over the last 5-year period, a basket of online brokers would have fared far better than an equal investment the major broad market index funds not including QQQ (ex. SPY, DIA, IWM, etc.). The brokers basket, as shown, also would have outperformed the financials sector (XLF, etc.) over the same period.

We look forward to watching this basket of online brokers as we go forward to further inspire research. Please check out our other article comparing a basket of market providers to the broad market.

References

S&P 500 Dividend Yield

IBKR Website

AMTD Website

ETFC Website

SCHW Website

Robinhood Brokerage Website

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. Consult your financial advisor.